Wednesday, October 31, 2007

Fed Cuts Rates, Language Indicates Pause

The Federal Reserve today cut it's benchmark fed funds rate and the discount rate by 1/4 of a point each. While this action should help banks and many borrowers who are pegged to the prime rate, the statement that accompanied the rate reduction leaves much to be desired. While the Fed indicated that the action was taken to help "forestall" the consequences of a slowing economy, there was an indication that the Fed may pause from cutting rates further in the immediate term, as they noted that "the upside risks to inflation roughly balance the downside risks to growth". By indicating a potential pause in rate cuts, the Fed effectively mutes the impact of the 1/4 point that they cut, in that the expectation for lower rates sooner rather than later are diminished, and real interest rates are less likely to go down in the near term.
How does this impact the New York Housing Market? Lower rates are good news for any real estate market, so today's cut is a plus. A Fed statement that did not indicate a pause in rates would have been better. At the same time, a more dramatic cut or pessimistic statement could have spooked the market, which could have caused more harm than good. Lower rates also mean a lower return on dollar denominated assets, which in turn should mean a continuation of the trend for a cheaper and cheaper dollar-also a plus for the NY Market. All said, this cut is good for the NY Real Estate Market, it could have been better, but it could have been alot worse.

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